Taiwanese Banks Warm to DRAM Makers Powerchip, Winbond

Taiwanese DRAM makers Powerchip Semiconductor and Winbond Electronics both gained concessions from banks to ease their fiscal pain on Wednesday, a further sign they could survive the global DRAM downturn.

The deals could also delay consolidation among Taiwan's DRAM makers. The government moved earlier this year to establish a new chip maker, Taiwan Memory Company (TMC) to speed consolidation among the island's cash strapped chip makers, but the plan appears to be in limbo as officials decide on the best way to move forward.

TMC was originally supposed to consolidate suffering DRAM makers into one big company. Now, officials say TMC will focus on developing new DRAM technology for Taiwanese memory chip makers, and will not bail companies out.

The revised plan addresses the long term intellectual property problem in Taiwan's DRAM industry, but it does not settle fiscal problems for chip makers nor the banks that have loaned them billions of dollars. Government officials have said they will wait until TMC formally submits its business plan to them before commenting further on Taiwan's DRAM industry.

Banks and chip makers on the island appear to be moving forward on their own.

On Wednesday, a group of Taiwanese banks agreed to extend the repayment deadline for Powerchip, formerly Taiwan's biggest DRAM maker, on loans reported to be worth NT$63 billion (US$1.91 billion). The new six-month grace period ends December 30, 2009, Powerchip said in a statement to the Taiwan Stock Exchange. The company only has to make interest payments on the loans until then.

This is the second loan extension banks have granted the chip maker. The previous one was brokered by government officials to help ease problems for DRAM makers early this year. The due date on that deal passed on June 30.

The new loan extension will help shore up Powerchip's financial situation. The debt-laden company last month convinced holders of US$158.05 million in convertible bonds to settle for company stock shares instead of cash for a portion of the repayment. A company executive said another corporate bond, NT$2 billion, said to have been due this month, will also not pose a problem for Powerchip.

"That doesn't actually come due until next year," said Eric Tang, a vice president at Powerchip.

Powerchip was also boosted by a US$125 million loan from Kingston Technology, a DRAM module maker and chip distributor, earlier this month. The cash will go a long way in easing its financial burden. Analysts had estimated the company's cash position had fallen to just NT$500 million after the settlement on the US$158.05 million convertible bond.

Winbond Electronics, the smallest of Taiwan's big five DRAM makers, said it signed an NT$3.7 billion syndicated loan agreement on Wednesday with a group of Taiwanese banks. The company will use the funds for loan repayments and for working capital, it said in a statement.

Taiwan's DRAM makers have faced tough times amid the global recession due to slumping demand for their chips, which are mainly used in computers. Over-investment in new factories a few years ago caused a chip glut, leading to falling DRAM prices and mounting losses for producers. Most Taiwanese DRAM makers have reported continuous losses since the middle of 2007.

DRAM prices remain low, hindering the ability of companies to make money.

Taiwan's five biggest DRAM makers reported a combined net loss of NT$159.49 billion last year, more than a four-fold increase over a net loss of NT$36.99 billion in 2007, according to data companies filed to the Taiwan Stock Exchange. Revenue in 2008 totaled NT$179.17 billion, down from NT$255.94 billion.

Last month, the company chosen by Taiwan Memory Company (TMC) as its main foreign technology partner, Japan's Elpida Memory, secured an investment from TMC as well as funds from the Development Bank of Japan, boosting its cash position.

TMC will invest ¥20 billion (US$213.4 million) in Elpida, while the government backed bank will inject ¥30 billion in the company, according to Elpida. The DRAM company will use the cash to install new production line technology able to increase the number of chips rolling off production lines while lowering costs by 20 percent.

"Our business restructuring plan will not hinder the elimination of the excess supply in the industry," Elpida said in the statement.

Excess supply has been the fear many analysts and industry watchers raise as DRAM makers obtain new sources of cash from business partners and banks. Many DRAM makers have shuttered factories amid the global recession, but could reopen them if chip prices increase, and thereby flood the market with cheap DRAM again. The scenario would be good for users because it would keep DRAM cheap, but it would be devastating for companies trying to return to financial health after a two year chip glut.

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